research project with the title Bittersweet
brightness the impact of CEO's bright personality traits on corporate fraud
corporate fraud is an omnipresent topic that often implies devastating outcomes for all
societal members due to its tremendous impact corporate fraud is a promising
and exciting field of research let's look at two companies that have committed fraud in the past
or and Abercrombie and Fitch comparing both companies by situational and organizational
factors it becomes obvious that they were completely different whereas Pfizer operated
and of course still operates in the industry of pharmaceuticals Abercrombie belongs to the
apparel retail industry which is associated with a completely contrasting industry environment
moreover in the year before fraud commitment both companies fundamentally differ in size
Pfizer was about 22 times larger than Abercrombie in terms of total revenues
referring to their financial situation abercrombie's return on assets was almost five
times higher than pfizers comparing these cases of corporate fraud situational and organizational
factors show no commonalities that point to a higher fraud propensity however the question
arises are there commonalities on another level looking at the respective CEO who was
responsible for these fraudulent actions we ask does the individual level matter more precisely
do the CEOs of such firms have something in common what makes them more prone to fraudulent actions
so why do we regard the company's CEOs as promising research Avenue
upper echelon's theory states that CEOs are the most powerful persons within their companies
thus they have a high impact on organizational decision making they Define a company's common
vision and hence predetermined goals which are building the base for strategic decisions
furthermore like other individuals CEOs differ in their perception of the environment
these differences can arise from limited fields of vision which means that different CEOs with
different levels of experience and knowledge attend differently to specific environmental
stimuli more precisely they detect different topics to put their focus on
hence strategic decisions are based on subjective interpretations of specific situations
keeping these managerial differences between CEOs in mind one crucial question arises
where do these differences stem from
upper echelon's Theory argues that managers characteristics such as past experiences values
and personality affect the firm's strategic position and performance we're a CEO experience
captures all relevant background information of a CEO for example tenure or prior career experience
CEO personality describes a relatively stable disposition of character traits certain
personality traits of a CEO strongly influence her or his personal views of situations affect her
or his decision making and consequently affect an entire organizational behavior and its performance
considering literature on corporate fraud there are also three individual factors that
strongly influence a CEO's Behavior first a large pay gap between a firm's CEO and
the other members of the top management team can provoke a competitive culture and thus
provide incentives for illegal means second a CEO's willingness to engage in corporate fraud
is also driven by the compensation structure Scholars revealed a strong relationship between
variable payments particularly equity-based compensation and the likelihood of a lawsuit
third addressing personality in corporate fraud literature narcissism has been proven
to foster a CEO's fraud propensity narcissists intend to optimize their
personal benefits and do not feel confused by achieving this goal by acting unethically
bringing together both streams of research it gets obvious that personality traits might be promising
in order to explain fraudulent Behavior up to now a strong Focus has been on dark personality
traits for example narcissism since dark personality traits were strongly associated
with detrimental company outcomes for example fraud since Recent research has questioned the
strict assignment of dark personality traits to detrimental outcomes and bright personality
traits to desirable outcomes we intend to break with these predominant stereotypes therefore we
connect bright personality traits with corporate fraud in order to obtain a holistic view in
this relationship we examine a complete set of personality traits the Big Five personality traits
based on an intensive literature screening we developed the following five hypotheses referring
to the impact of Big Five personality traits on the CEO's willingness to engage in corporate fraud
addressing the big five dimension open is to experience we postulate that high levels of
creativity unconventionality and an attraction for risk-taking foster fraudulent activities
hence the CEO's degree of openness to experience is positively related to the
likelihood to commit corporate fraud the second dimension conscientiousness is associated with
a strong goal in performance orientation which seems to outweigh lower risk-taking preferences
based on these findings we propose the CEO's degree of conscientiousness to be
positively related to the likelihood to commit corporate fraud a strong ego and impulsive
reaction to Temporary failure and the feeling of invulnerability characterize extroverted CEOs
these attributes might encourage extroverted CEOs to engage in corporate fraud which is the reason
why we hypothesize a positive relationship between the CEO's degree of extraversion and
corporate fraud for agreeableness there arises an ambitious picture
on the one hand agreeable CEOs prefer lower risk taking which suggests a negative relationship
between agreeableness and the engagement in corporate fraud on the other hand agreeable
CEOs could perceive High shareholder and Broad pressure together with their avoidance
of conflicts a positive relationship between agreeableness and corporate fraud becomes obvious
following this logic we introduce competing hypothesis for the dimension agreeableness
our last hypothesis refers to the last dimension of the big five namely neuroticism
neurotic CEOs show high levels of self-doubt insecurity anxiety and hostility
based on these attributes they show a strong tendency for social comparison resulting in
the perception of negative outcomes or threats these perceived inabilities paired with the
belief not to succeed by working hard could push a neurotic CEO into fraudulent engagement
consequently we hypothesize a positive relationship between the CEO's degree
of neuroticism and the corresponding likelihood to commit corporate fraud
in order to test our hypothesis we base our investigation on a North American sample of
186 CEOs of s p 500 firms our period of Investigation is from 2002 to 2017.
but how did we collect data for the CEO's personality assessment
as already mentioned we chose the personality concept of the Big Five in order to investigate
personality traits holistically and break with predominant stereotypes
Oscars and it all complains that CEO's decisions based on their behavioral mechanisms are
investigated insufficiently due to methodological obstacles in assessing their personality traits
since primary data is predominantly only available for small and private companies
these findings could not be easily transferred to large public ones an alternative to primary data
could be found in language samples of CEOs current approaches refer to spoken language in form of the
CEO's answers given in conference calls conference calls consist of two parts a presentation as well
as a questions and answers part in line with prior research we intended to gather the corresponding
transcripts of quarterly earnings conference calls for the CEOs by using Thomson Reuters icon
since the presentation part of those earnings conference calls is often accused of being
scripted we based our investigation on the answers part of the Q a session in our last step we had
to choose the methodological approach in this study we leveraged approaches from the field of
machine learning to measure a CEO's personality in line with my Umbra at all we trained a neural
network based on the stream of consciousness essay data set provided by panabaga and King
we choose an open vocabulary and test the different engram sizes from 1 to 5 as features for
the model we used compact model architecture with three hidden layers and five neurons in each layer
the train model was then used to predict the individual personality dimension of a
CEO for all big five dimensions in our study we conceptualized our dependent variable as the CEO's
engagement in corporate fraud operationalized a set of Securities class actions lawsuits
Securities class actions lawsuits are shareholder initiated lawsuits
against firms and their top Executives in response to misleading or deceptive Behavior
as top executives are directly responsible for disclosing information to shareholders this
type of fraud is attributable to top executive defendants
in line with previous studies corporate fraud is binary coded one if a CEO was engaged in
any settled lawsuit in a given year and zero otherwise we collected cases of Securities
class actions lawsuits at the Securities class action Clearinghouse of Stanford Law School
the conviction of a CEO's illegal behavior is compared to all non-fraudulent CEOs a relatively
rare case thus random sampling of fraudulent and non-fraudulent CEOs is not reasonable
following prior research we used a more powerful matched pair sample design
firms corresponding to the CEOs were matched based on three criteria fraud year industry and firm
size we matched each firm accused of fraud with a control firm from the same industry based on
the four-digit standard industry classification code firm size was represented by total assets
we used a conditional logic regression analysis to test our hypothesis
this method is typically used in matched pair sample designs with binary dependent variables
as it considers the conditional nature of the likelihoods that a matched pair sample represents
conditional logistic regressions do not produce an overall intercept and
thus estimate a model with a fixed effect
after the wrap up regarding our research model let's have a look into our results
model 1 solely includes the control variables of our study in this setting performance relative to
the social aspiration level has a negative effect on the incident of corporate fraud this is in line
with Harrison bromley's results that illustrate that the likelihood of fraudulent behavior
is highest for the lowest or most negative values of negative social relative performance
model 2 includes our independent variables the big five dimensions of personality traits
considering the output table it gets obvious that the higher the level of a CEO's conscientiousness
the higher is her or his propensity to perpetrate fraud the corresponding results of our estimation
show a positive and significant relationship referring to a CEO's degree of neuroticism
also a positive relationship to the likelihood to commit corporate fraud could be detected
the estimated coefficient for this independent variable is positive and statistically significant
providing good support for our hypothesis 5. consequently CEOs who score high on neuroticism
have a higher predicted probability to engage in behavior that results in unsettled lawsuit
for the other three dimensions openness to experience extroversion and agreeableness
we found no significant results which led to the rejection of the corresponding hypothesis
so which contributions to our study offer to existing literature
first we provide further insights into upper echelon's Theory by focusing on the CEO while
investigating her or his impact on strategic decision making more precisely corporate fraud
previous research on fraudulent Behavior often put the firm including its structures and culture in
the focus of their investigations however in most of the cases the top Executives of a company are
accused to perpetrate fraud with our study we follow the call of schnatterly at all to shed
more light on the CEO by examining the impact of her or his personality on corporate fraud
second we contribute to the ongoing discussion about the impact of bright and dark personality
traits on organizational outcomes whereas previous Studies have shown positive as well as negative
organizational consequences associated with dark personality traits Smith at all complains about
prevailing literature to strongly assign bright personality traits solely to beneficial outcomes
in order to question this relationship and break with traditional stereotypes
we counter-intuitively connect bright personality traits measured by the big
five Dimensions with detrimental company outcomes more precisely fraud by doing so we derive an
in-depth understanding about the composition and mechanisms of the single elements of the
Big Five personality traits and illustrate their impact on managerial decision making
third linguistic analysis is widely used for personality assessment purposes since
it represents a remarkable alternative to questionnaires and interviews to the best
of our knowledge no other study related this measurement approach which facilitates broader
personality samples to corporate fraud by pursuing an open vocabulary approach followed
by feed forward neural networks as well as boosted regression trees we refer an Innovative and modern
methodological approach for assessing personality to the field of fraudulent Behavior fourth our
study contributes to fraud literature since we analyze a specific kind of fraud Securities
class actions lawsuits that attracted not only practitioners but also scholars in recent years
with our study we follow the emerging trend of applying these lawsuits in management literature
since Securities class actions lawsuits are raised against a company and its top
Executives they are perfectly suitable for research on top management teams
besides theoretical contributions we also support companies and Regulators with new
intriguing insights about the degree of certain personality traits and its impact on the tendency
to behave fraudulently considering the example of the introduction both of the depicted fraudulent
CEOs Henry mckinnell and Michael Jeffries show very similar levels for all big five dimensions
the degree of agreeableness and neuroticism is even identical
based on these insights companies are enabled to search for or choose more appropriate candidates
for vacancy or positions organizations need to maintain The credibility in their corporate
governance systems by improving internal controls and developing an ethical corporate culture
the CEO of a company should represent this culture particularly with her or his personality
simultaneously our results support controlling institutions like the
Securities and Exchange Commission sec in the context of fraud prevention
legal Regulators are highly interested in antecedents of corporate fraud to concentrate
their investigations on cases that show high indications for illegal schemes
with our study we hope to encourage Scholars as well as practitioners to investigate corporate
fraud and especially its antecedents in order to reduce or in the best case to stop its occurrence
if you have any questions or remarks we would be delighted to receive your message